Fonds de hedge (document en anglais)

How do FOFs work

The logic behind a fund of hedge funds is fairly simple. Investors purchase an interest fund of funds, and their assets are put togheter with those of other investors. This creates a pool of money which is in turn invested with a number of hedge funds.

Legal Structure

A fund of funds entity can be organized in a number of ways, including as a limited partnership (LP), a limited liability company (LLC), an offshore corporation, or a trust. Depending on the structure, the type of interest held by an investor will differ. For example, if the fund of funds is organized as a limited partnership, the investors are the limited partners. If organized as an LLC, they are members.

Domicile

Fund of funds could also be offshore and onshore. Almost one-third of funds of funds are domiciled in Delaware, one fifth are domiciled in the Cayman Islands, and another one-fifth are in the British Virgin Islands which have become havens for offshore money for a variety of reasons, including tax benefits and their superior financial infrastructure.

Minimum investment size

One of the main reasons why fund of funds are attractive to investors is the relatively low minimum investment size. 2009 statistics show that less than 6% of funds of funds have a minimum investment requirement of more than 1 million USD. In fact almost half of fund of hedge funds have a minimum requirement of just 250 000 USD. This can be attributed to the economies of scale investors achieve by pooling their funds together.

Additional fees

Of course all this comes at a certain price whether justified or not. Investors must pay an extra layer of fees at the fund of funds level in addition to the fees paid to the underlying hedge fund managers. Most funds of funds charge an asset-based management fee, and many will also charge a performance-based incentive fee. Management fees are usually charged as a percentage of assets, normally between 1 percent and 2 percent. Management fees are normally calculated and paid on a monthly or quarterly basis. Some, but not all, funds of funds charge an incentive fee. An incentive fee, also called “carried interest,” is charged as a percentage of net new profits. For example, an incentive fee of 10 percent means that 10 percent of the net new profits generated by the fund of funds is kept by the fund of funds.

Subscription, redemption and liquidity

Things get a little more complicated when we start talking about redemption and liquidty. In most cases redemptions and subscriptions are monthly or quarterly. This depends on the underlying hedge funds. For instance, if each of the funds in a fund of funds allows for monthly subscriptions and quarterly redemptions, then the fund of funds will probably offer the same liquidity. However, if one of the funds invested in by the fund of funds allows only annual redemptions, the redemption process becomes more complicated. These difficulties with the subscription and redemption process generally requires that the investor send notification within a predetermined, specified time period in order to place an order. Many funds of funds require at least a 15 business-day notification for either a subscription or a redemption.

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